Rev. Rul. 88-19

1988-1 C.B. 114, 1988-13 I.R.B. 5.

                       Internal Revenue Service

                                 Revenue Ruling

          CONTROLLED CORPORATION; STOCK DISTRIBUTION; ACTIVE BUSINESS

                           Published: March 28, 1988

Section 355. - Distribution of Stock and Securities of a Controlled Corporation, 26 CFR 1.355-1: Distribution of stock and securities of controlled corporation.

(Also Section 302; 1.346-1.)

  Controlled corporation; stock distribution; active business. Several revenue rulings dealing with the active trade or business requirement under section 355(b) or the substantially similar requirement under former section 346(b) (now section 302(e)) of the Code have been reconsidered and are being revoked because of the failure of those revenue rulings t o state sufficient facts to support their respective conclusions.  Rev. Ruls. 5 8-164, 57-334, 56- 557, 56-555, and 56-554 are revoked.

  The Internal Revenue Service has reconsidered several revenue rulings dealing with the active trade or business requirement under section 355(b) or the substantially similar requirement under former section 346(b) (now section 302(e)) of the Internal Revenue Code.

  The active trade or business requirement of these Code provisions connotes substantial managerial and operational activities directly carried on b y the corporation. See, e.g., Rev. Rul. 86-126, 1986-2 C.B. 58; Rev. Rul. 86-12 5, 1986-2 C.B. 57; Rev. Rul. 73-237, 1973-1 C.B. 184; and Rev. Rul. 73-234, 197 3- 1 C.B. 180. Furthermore, the activities must be sufficient to distinguish the corporation's entrepreneurial endeavors from mere passive investments. See, e. g., Rev. Rul. 79-394, 1979-2 C.B. 141.

  The following revenue rulings do not represent the position of the Service because each concluded that the active trade or business test was met but failed to state sufficient facts to support t hat conclusion: Rev. Rul. 58-164, 1958-1 C.B. 184; Rev. Rul. 57-334, 1957-2 C.B. 240; Rev. Rul. 56-557, 1956-2 C.B. 199, clarified on another point by Rev. Ru l. 86-4, 1986-1 C.B. 174; Rev. Rul. 56-555, 1956-2 C.B. 210; and Rev. Rul. 56-5 54, 1956-2 C.B. 198.

EFFECT ON OTHER REVENUE RULINGS

  Rev. Ruls. 58-164, 5 7-334, 56-557, 56-555, and 56-554 are revoked.

DRAFTING INFORMATION

  The principal author of this revenue ruling is Mr. Peter G. Lynard of the Corporation Tax Division. For further information regarding the revenue ruling contact Mr. Lynard on (202) 566-9292 (not a toll-free call).

Rev. Rul. 88-19, 1988-1 C.B. 114, 1988-13 I.R.B. 5.